Can You Count On Your Pension?

While 401(k)s have been hit hard by the market downfall, those that are counting on defined benefit plans for retirement haven't been left unscathed either. As the plans sponsored by the largest 1,500 U.S. companies went from a surplus of $60 billion at the end of 2007 to a $409 billion deficit at the end of 2008, it's little wonder that the Pension Benefit Guaranty Corporation (PBGC) took over as many pensions in the first six months of 2009 as it did in all of 2008, and almost four times the number of participants and twice the unfunded liabilities.

Besides the well publicized GM and Delphi problems, many other firms face dire situations. Here's how to find out how your company is doing and, if they aren't doing well, what you can do about it. (Learn more about the PBGC in The Pension Benefit Guaranty Corporation Rescues Plans.)Know How Your Firm Is DoingThe Pension Protection Act of 2006 requires plan participants to receive annual plan funding notices. You may have skipped through this in the past, but if you are concerned now, this is the place to start. What you are looking for is Form 5500. It will tell you if the plan is 100% funded or not. If it's not 100% or more, it will tell you the actual funded percentage. It will also tell you the total assets and liabilities of the plan, the allocation of plan assets, and give a description of benefits insured by the PGBC.

The key thing you are looking for is on line 2(a) the "Current Value of the Assets"; this is what is owned by the pension fund. Then compare it to line 2b(4) which is the total amount of liabilities owed by the pension fund. If they more assets than liabilities, then they are fully funded or over-funded. But if they owe more than they own, then the pension is under-funded. A small amount of under-funding isn't cause for alarm, but if it's under-funded by more than 20%, then you might want to be concerned. (For more, read Analyzing Pension Risk.)

What to do About ItInvestigate the situation completely. If your pension is under-funded, it's possible the company is just going through the same hard times as everyone else and will bounce back. So don't go overboard and panic. However, it wise to find out what's going on. Simply asking questions about how the under-funding will be addressed may get the ball rolling in a good direction. Firms can't just walk away from their funding obligations, but they have different options in how to address shortfalls. You want to know what they are going to do before you do anything. (Read Pension Plan: Pain Or Pleasure? to find out why employees have a love/hate relationship with pension plans.)

Consider all your options. If the shortfall is substantial and the company is in trouble, they may take action that will reduce your benefits. The company may provide buyout options for some employees. If so, carefully consider taking it. It might be better to jump off a sinking ship than go down with it. Another option is to start saving for your retirement in other ways. In fact, this is always a good idea as there is no substitute for controlling your own money. Of course, this means reducing your standard of living and spending less, so it's not a popular option. (Learn more about funding your own retirement during economic uncertainty in Variable Annuities: The Do-It-Yourself Pension Plan and Net Worth Nosedive: Can You Still Retire?)

Take ActionIf the situation and resulting options are going to significantly impact your life, then you need to take action. Common tactics used by firms to relieve pension pressure include modifying the plan to a cash benefit plan, changing the benefit formula or freezing the pension altogether. While none of these moves benefits the participants, firms have a responsibility to compete in a tough market place.

GM's troubles were not solely caused by pension responsibilities, but the company's massive pension plan did hurt its competitiveness. So while you may not be in a position to stop any cutbacks, if you unite as a group, then you might be able to reduce the cutback or modify them to mitigate the losses. A soft landing over a period of time is better than a crash-and-burn approach – for both the firm and the participants.

When everything fails. If your firm goes bankrupt with an underfunded pension plan, the PBGC will help. In most cases, you will get the full vested benefit owed when the plan was terminated. However, the maximum amount is $54,000 for 2009, so high salaried employees will take a reduction. More important to most people is that maximum benefit is reduced more the further you are from retirement, and PBGC isn't adding to it or keeping up with inflation. PBGC coverage isn't perfect, but it's better than nothing.

Know the RiskIn conclusion, if your retirement plan is based on a defined benefit plan from your employer, it may seem like you are set. But as we have seen, even stalwarts like GM can get in trouble, and so it's incumbent upon you to stay abreast of the situation and plan accordingly. Just because it doesn't feel like it's risky, doesn't mean there no risk at all. (For more, read Lump Sum Vs. Regular Pension Plan Payments and Is Your Defined-Benefit Plan Safe?)